Posted by Tim Stobbs on August 19, 2009
It finally happened. EIT.UN cut their distribution by a third. I can’t say I’m surprised. Some of the funds that make up EIT.UN have been cutting back distributions themselves so I was expecting a cut sooner than this.
To be completely honest I was expecting it to be worse. I was expecting a cut of about 40% in regards to taxation of income trusts, so keeping it this high was a bit of nice surprise, but it may have a second cut post 2011. Also the writing was on the wall nothing can yield 18% forever, actually seeing it that high was a big red flag they would have to cut it at some point. The current yield is now closer to 10% based on market price which is still a bit high, but not in the atmosphere.
Overall I haven’t double checked the numbers but I’m likely out about between $400 to $500 a year from this cut. Yet my personal yield is still likely around 12% so I’m still happy with the return I’m getting.
What I find interesting about this cut and other dividend cuts is it really does illustrate to me the flaw in the original Derek Foster strategy. You can’t just buy a basket of dividend payers and income trusts and live off the cash flow. Dividends and distributions are not fixed income. There is no guarantee that the cash flow from that company will continue for your entire retirement. Also when you add in the risk that after a cut often the share price drops you can almost be assured to lose some capital as well when this happens.
So as complete unsexy and boring as it is some kind of fixed income is required to fund a early retirement. Actually I would argue that based on what your spending habits will be you might want to have a very high amount of fixed income. Basically your asset allocation should be set up that your fixed income portion can spin off enough cash to keep you fed and a roof over your head. So depending how much extra spending you have in your retirement budget you might have a fixed income portion from 50 to 80%.
So have you had a distrubtion or dividend cut affect you yet? If so how much cash flow did you lose?